Global reinsurer capital has risen by 1% so far this year, reaching $510 billion by June 30th according to reinsurance broker Aon Benfield’s latest Aon Benfield Aggregate study. The report highlights the impact of the capital markets which have been responsible for boosting reinsurer capital at a time when traditional business models have struggled.
The study offers a broad measure of the capital available for insurers to trade risk and includes both traditional reinsurance capital and alternative capital, from third-party investors in the form of reinsurance sidecars, reinsurance fund vehicles, ILS specialists and other forms.

While global reinsurer capital has risen to $510 billion by the end of June, up 1% since the start of 2013, the group of 31 traditional reinsurers that Aon Benfield tracks saw its combined capital fall by 1%, or $4 billion, to $313 billion.

Despite this group of 31 leading reinsurers effectively losing or reducing capital during the year, the global reinsurance market gained capital, perhaps showing the influence of third-party capital on the space and its growing contribution to global reinsurance underwriting.

It would be interesting to know what the split within this growth is in terms of traditional reinsurance capital versus non-traditional, or alternative, reinsurance capital, but unfortunately Aon Benfield does not go into that in the report.

At a time when we know there have been significant inflows of capital into the reinsurance space from third-party investors, via ILS, catastrophe bonds, sidecars and collateralized reinsurance fund vehicles and structures, it seems likely that a good proportion will be capital of the non-traditional variety.

It’s interesting to see that reinsurance market capitalisation has risen by only 1% in the first half of this year, compared to 11% over the whole of 2012. Many commentators continue to suggest the market is overcapitalised, but as we can see from this study the rate of capitalisation appears to have slowed.

Certainly the rate of capitalisation of traditional reinsurers seems to have dropped, perhaps even turned negative, as evidenced by Aon Benfield’s 31 leading reinsurance firms that it tracks. That would suggest that the growth is coming from alternative capital sources, a trend we may see continue through the rest of 2013 and into 2014.

The report goes into some detail on the organisational and structural changes that the reinsurance sector is undergoing in order to be able to accommodate, work with and capitalise on the increasing interest and capital inflows from the capital markets.

The increasing levels of non-equity capital which have flowed into the reinsurance market from third-party investors has mitigated the impact of unrealised investment gains on bond portfolios, but the trend also presents a growing challenge to traditional reinsurers, according to Aon Benfield’s report.

Aon Benfield notes that leading reinsurance firms that have engaged with the new capital, flowing into the space from investors such as pension funds, life insurers, endowments and high net worth investors, are beginning to find new income streams and operating advantages from these ventures.

These ventures into third-party capital mainly involve the sponsoring of catastrophe bond transactions, to reduce their weighted cost of underwriting capital, the sharing of underwriting opportunities through sidecars and managed vehicles, or managing reinsurance-linked investment funds.

Over half of the 31 firms included in the Aon Benfield Aggregate reported increased amounts of reinsurance cession, largely thanks to the use of third-party capital as well as the impact of third-party capital on catastrophe cover allowing them to purchase opportunistically.

Aon Benfield says that these types of activities, and the fact that leading reinsurers are almost all participating in them to some degree, show the start of; “A true rotation in how the reinsurance business will be capitalized.”

This is the disruption that we’ve written about many times in the last few years, most recently in this piece, and demonstrates that there is a new market dynamic emerging which leading firms are jostling to position themselves to take advantage of.

Aon Benfield notes that this disruption has led to business model evolution within its Aggregate group and study. This structural shift in the way capital is raised and deployed is still in progress, with a broadening pool of new money from investors flowing into structures offering access to quality underwriting business.

The report cites the increasing acceptance of reinsurance as an asset class among capital markets investors, who are now entering the sector after performing extensive due diligence, investing small percentages of assets in search of diversification and seeking lower, more stable, longer term returns than was historically the case.

Much of this capital has flowed to specialist reinsurance-linked investment managers, who deploy the capital into insurance-linked securities (ILS), catastrophe bonds, industry loss warranties (ILW’s), sidecars and other collateralized reinsurance structures. The focus remains on property catastrophe reinsurance and retrocession business, largely U.S. based, although Aon Benfield says market expansion into other lines of reinsurance business and new territories is underway.

Reinsurers are adapting to work with this new capital, launching their own funds, investment managers and collateralized reinsurance facilities. It is helping them to offer larger line sizes, more diverse solutions for their clients and new offerings, as well as enhancing their own risk transfer costs and making capital bases more efficient.

Over time, Aon Benfield expects this changing business model will result in less underwriting on rated balance sheets and more on ‘satellite’ structures backed by third-party capital. How reinsurers adapt to this new reality is going to be the key structural issue we discuss in reinsurance for some years to come, we believe.

This capital involvement, from alternative reinsurance capacity, is now evolving to full on engagement and away from simple sidecar quota shares and cat bond investment. It is also becoming key to look outside of the typical business areas that third-party operated in even just a year or two ago, in search of diversification and stable returns, which is going to help the ILS and collateralized markets expand.

Many of the constituent reinsurers within the Aon Benfield Aggregate are prime examples of reinsurance and capital markets convergence in action, and the report provides a list detailing these alternative reinsurance capital initiatives. This includes over $1 billion of new capital being injected into sidecar vehicles operated by the Aggregate, including eight new structures.

We’ve repeated the list below along with links to more information where we have previously covered each reinsurers initiatives.

ACE – Altair Re formed with $95m of third party capital to provide collateralized capacity for ACE Tempest Re (Apr 2013)

Mike Van Slooten, Head of Aon Benfield’s International Market Analysis team, commented on the study; “The ABA companies reported strong underwriting results in the first half of 2013. Interest rates have begun to rise ahead of expected tapering of the Federal Reserve’s quantitative easing program, which is negative for book values in the short-term but positive for earnings in the longer-term. We continue to see evidence of operational restructuring and strategic repositioning, as established reinsurers react to the threats and opportunities posed by the deployment of new funds from capital markets investors.”

One other point on this study worth mentioning is that at the moment the Aon Benfield Aggregate, of 31 leading reinsurance firms, consists of all traditional reinsurers, the majority of which have less than $10 billion of shareholder capital.

We wonder how long it will be until the study includes the likes of Nephila Capital and other large insurance-linked securities managers, a number of whom deploy more underwriting capacity over the course of the year than the smaller Aon Benfield Aggregate firms.

With alternative reinsurance capital and ILS growing in stature in the global reinsurance market we feel a report into the capitalisation of the market is certain to include such ILS and alternative reinsurance capital managers in years to come.

There are so many reports and commentaries coming out on alternative reinsurance capital and ILS in the run up to the Monte Carlo Rendezvous event that we felt it worth highlighting some other reading on the topic, all from the last week or so, which you can find below (most recent first):